June 9, 2015
Recently, several articles have indicated that a number of states are facing at least some level of “budget gap” or “shortfall” for either fiscal 2015 or fiscal 2016. One of the most important things to note about state budget shortfalls – or budget gaps – is that they are based on what a state expects to receive in revenue and what the state expects to need to spend. If the money coming in is not sufficient to cover the expected costs, there is a “shortfall”. Shortfalls or budget gaps are therefore a function of both spending and revenue forecasts, and can vary greatly depending on the accuracy and timing of these forecasts. Budget gaps can differ in their size, scope, and severity, as well as in their timing.
As the current fiscal year winds down, most states appear to be seeing revenues come in near target or slightly above projections. Some states may be facing budget gaps or shortfalls brought on at least in part by factors such as slower than projected economic growth, the decline in the price of oil, higher than forecasted health care spending, tax related changes, federal cutbacks, mandatory spending pressures, and long-term obligations such as pension funding. While one state may be experiencing a budget shortfall for the current fiscal year, another may be projecting a shortfall for the upcoming budget year, fiscal 2016.
Next Tuesday, NASBO will release its Spring Fiscal Survey of the States, which will include updated data on state fiscal conditions for both fiscal 2015 and fiscal 2016. The report’s data will show that overall state finances continue to slowly improve despite some states dealing with shortfalls to one degree or another.
How A Shortfall Can Occur & Actions to Adjust
In the examples below, NASBO seeks to provide a deeper understanding of budget gaps.
If State A forecasts revenue growth of 2 percent for the upcoming year and the revenue comes in at 2 percent – they experience no “shortfall”. The state could be worse off than they were before – let’s say growth was 6 percent the previous year – but there would be no shortfall. Another example is State B that forecasts 5 percent revenue growth, up from 3 percent growth the year before. If actual revenues only grow 4 percent, State B is still seeing revenue growth, but is also experiencing a revenue shortfall during the current year when comparing actual collections to budgeted amounts. Both states in these examples may be having some form of fiscal difficulty, although only one has a measurable shortfall, State B. While State B, which did not forecast the correct rate of growth, would have to take actions during the course of the year to balance its budget, in the end both states will have dealt with some form of fiscal strain.
Additionally, shortfall numbers change frequently – they are a “moving target”. The shortfall amount can change month-to-month as a state updates its revenue forecast. For example, a state may pass a balanced budget in April for the fiscal year that begins in July. However, by October that state may be experiencing revenue growth that is lower than forecast, leading to a “shortfall” of $100 million. Over the next two month period, the state may see revenues rebound and no longer face a shortfall. States must make determinations during the course of the fiscal year regarding the optimal time to take actions to adjust to a shortfall.
States may take various actions if they face a budget shortfall or gap including spending reductions, tax increases, the use of reserves, personnel actions, and the transfer of funds. An additional resource on this topic includes NASBO’s 2013 report entitled State Budgeting and Lessons Learned from the Economic Downturn, which highlights actions states took to deal with the rapid decline in revenues during the most recent recession. Finally, last month, NASBO released an updated version of its publication Budget Processes in the States, analyzing similarities and variations among state budget practices, and containing information on how states manage their budgets, including a governor’s ability to withhold funds. It should also be noted that while shortfalls are often referred to as “deficits”, almost none are technically deficits. Unlike the federal government, almost all states have to balance their budgets and do not technically run deficits. Budget Processes in the States also contained updated information on states’ balanced budget requirements.